DBRS Morningstar Confirms Rating on Cominar Real Estate Investment Trust’s Senior Unsecured Debentures at BB (high), Stable

DBRS Limited (DBRS Morningstar) confirmed its rating on Cominar Real Estate Investment Trust’s (Cominar or the Trust) Senior Unsecured Debentures at BB (high) with a Stable trend. The confirmation considers Cominar’s (1) strong portfolio diversification by asset type, tenant and property, despite some exposure to suburban office properties; (2) leading market position in the Province of Québec (rated AA (low) with a Stable trend by DBRS Morningstar); (3) notable assets in its property portfolio; and (4) good lease maturity profile and tenant quality. The confirmation also considers the Trust’s high leverage and geographic concentration in the greater Montréal area and Québec City. DBRS Morningstar recognizes that Cominar is focusing on efficiency; cost reduction; capital management, particularly debt; and improving leverage metrics.

In the nine months ended September 30, 2019 (9M 2019), Cominar continued to dispose of non-core assets and used the proceeds to repay debt. Over the same period, the property portfolio’s gross leasable area was 36.5 million square feet (sf), down from 38.1 million sf at the end of F2018 and 44.4 million sf at the end of F2017. In 9M 2019, total DBRS Morningstar-calculated debt reduced to $3.6 billion from $3.7 billion at the end of F2018 and $4.6 billion at the end of F2017. Since F2017, overall occupancy increased to 90.3% and EBITDA declined to $352.8 million as of the last 12 months ended September 30, 2019. Consequently, leverage (i.e., total debt-to-EBITDA ratio) has improved to and stabilized around 10.3 times (x) since F2018 from 10.9x previously. Interest coverage (i.e., EBITDA-to-total interest ratio, including capitalized interest) has remained in the 2.2x to 2.3x range since F2017. DBRS Morningstar expects Cominar to continue repaying debt using the sales proceeds from dispositions of non-core assets. The Trust previously announced that it had hired advisors to evaluate strategic options to surface the full potential of the Complexe de la Gare Centrale in Montréal and would provide an update in Q1 2020. DBRS Morningstar did not incorporate any transactions concerning the Complexe de la Gare Centrale into its forecasts.

DBRS Morningstar may consider a positive rating action if a sustained improvement in the Trust’s operating performance leads to a total debt-to-EBITDA ratio below 9.3x and EBITDA interest coverage above 2.30x, accompanied by a comfortable cushion for debt covenants. DBRS Morningstar may consider a negative rating action if a sustained decline in operating performance leads to deteriorating trends in financial risk metrics.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Entities in the Real Estate Industry (April 2019), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2019), which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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